How Big Players Manipulate the Stock Market

Major players in the securities industry sometimes manipulate stock prices using fraudulent trading practices and the media rumor mill. For instance, a shady hedge fund manager might buy a stock for more than it is worth or contact a media outlet with a fake concern about a blue-chip company’s new technology. Given that stock market manipulation takes place behind the scenes, it is very difficult for ordinary investors to determine if  manipulation has taken place.

Stock Market Manipulation and the Media

In a 2006 interview with The Street, Jim Cramer discussed the stock market manipulation he observed when he worked for a hedge fund. He suggested that hedge funds could help their positions by speaking with the reporters at CNBC and The Wall Street Journal to spread rumors about certain stocks – rumors that drive the share in a direction favorable to the hedge fund. He stated, “The great thing about the market is that it’s got nothing to do with the actual stocks.” Cramer went on to host Mad Money on CNBC. Many retail investors are suspicious that his takes may not be neutral, although their suspicions remain purely speculative.

It’s not just major media outlets facing allegations of stock market manipulation. In the wake of the GameStop and AMC stock rallies, CNBC published an article that suggested Reddit forums may have used illegal market manipulation to drive up stock prices, leading to major losses for hedge funds that had shorted the stocks – that is, executed trades that bet that the share prices would decrease.

Market Manipulation and GameStop

Accusations of widespread market manipulation were widespread after the prices of AMC and GameStop soared, although very few major players have faced any significant consequences.

Massachusetts regulators, however, fined MassMutual $4 million following allegations one of their brokers, Keith Gill, better known by his username “Roaring Kitty,” had used Twitter and YouTube to promote GameStop ($GME) to his followers. Brokerage firms are supposed to supervise their brokers’ social media use for any potentially manipulative statements. According to a class action lawsuit filed on February 16, 2021, Keith Gill’s conduct inflated share prices in violation of federal securities laws.

In January of 2021, the popular trading platform Robinhood removed the “buy” button for GME. Robinhood executives have stated that they removed the button because they did not have enough cash on hand to meet their clearinghouse deposit requirements. However, many suspected that powerful hedge funds were behind the removal. In particular, retail investors hurled accusations of market manipulation by Citadel, the market maker Robinhood used to process orders. Citadel CEO Ken Griffin reportedly had a $2 billion stake in Melvin Capital, a hedge fund that had shorted GameStop. Ken Griffin has responded to rumors that Citadel may have pressured Robinhood to remove the buy button, telling CNBC that the rumors were “an insane conspiracy theory.” Moreover, a federal judge dismissed a class action lawsuit accusing Robinhood and Citadel of colluding, citing a lack of credible evidence.

How Big Players Manipulate the Stock Market

Hedge funds are pooled investments that are actively managed. Investors often pick hedge funds based on the reputation of the hedge fund manager – a financial advisor who touts an especially high level of investing acumen. Hedge fund managers have a significant incentive to engage in manipulation, since their reputation rides on their ability to produce results. Another incentive — the better the fund performs, the more money the hedge fund manager makes.

According to a report from 2012, hedge funds “experience on average large, abnormal returns on the last trading day of the month.” These increases are concentrated in the last twenty minutes of trading and are a strong indicator that market manipulation is taking place.

Stock Market Manipulation Example: Reverse Mergers & Wash Trading

It’s not always big players manipulating stock prices. Even small companies can use stock market manipulation to make shares appear much more valuable than they really are. In a recent example, the SEC charged three individuals with artificially inflating the price of the shares of a company called Hometown International. Among other things, the SEC alleges Hometown International engaged in wash trading. Wash trading is a type of illegal trading where an entity buys stock from a seller that the broker also controls. Engaging in these “matched trades,” also known as “playing both sides,” creates the artificial appearance of interest in the stock, pushing the price up.

In addition to the regulatory action, the men at the center of the allegations are also facing criminal charges in New Jersey.

How Can Investors Protect Themselves?

There is very little the average investor can do to prevent market manipulation. If an employee of a company suspects their employer is manipulating the market, they can contact the SEC whistleblower hotline. The average investor should do their research to make sure they are working with a firm that complies with securities laws. Check your financial professionals on BrokerCheck and make sure to ask if your firm if they have any regulatory actions on their FINRA record.

If you are at all suspicious of your portfolio’s performance, do not hesitate to contact our securities attorneys: (877) 600-0098 or info@kurtalawfirm.com.